I’ve already gone into some detail about the Motley Fool Options service (see Motley Fool’s “4 Proven Options Strategies”). I’ve been subscribed to the service since January now, and am unimpressed. They pretty much have restricted themselves to writing puts and, if the puts are exercised, writing covered calls on the underlying stock. If you have the capital to create large enough positions to make this worthwhile, it’s a good way to get steady returns. There is the occasional bull put/call spread but … where’s the excitement? In addition, the trades are few and far between. Admittedly, it’s been a tough environment so far this year, but sometimes I get the feeling the MF guys are having a hard time finding a bearish or sideways position to take advantage of prevailing market conditions.
In my never-ending search for more excitement (wheeeeeeee!), I came across The Street-dot-com’s Options Profits service, which advertises at least “40 trades a week.” Forty trades a week … yowza! What kinds of trades are they? You name it, I think I’ve seen it at Options Profits — Condors, Iron Condors, Butterflies, Iron Butterflies, Strangles, etc. And I swear they have like nine analysts promulgating options trades throughout the day. Some are better than others.
When evaluating an investment letter, I think there are three criteria that matter:
- Initial trade conditions
Tracking/Performance – Why do we read these investment letters anyway? To improve performance? In order to do that, then, we need some way to know how the letters’ recommendations perform. Motley Fool Options has two separate hypothetical (I assume …) portfolios where they follow every recommendation they make. The process is quite transparent.
On the other hand, the fifteen or so analysts at Options Profits are held to no account except, perhaps, reader comments and when (or if …) they report on closing their positions. And rightly so — can you imagine how difficult it would be to track 40+ trades/week? Still, it doesn’t make for a very transparent or accountable site. Here’s hoping that Options Profits institutes some sort of performance tracking, preferably on an analyst-by-analyst basis, in the near future.
Initial Trade Conditions – Some services come up with some really sweet sounding trades. Sweet, that is, until you actually go and try to fill them. Either the spread is too wide or the right conditions for the trade existed for only a split second as the analyst wrote the recommendation. On the whole, the initial conditions for Motley Fool Options trades are easily fulfilled if you’re patient because of the more long term character of the trades — to show how much of a long-term bias the analysts at the Motley Fool have, they recently sent me an update that breathlessly anticipated the upcoming batch of 2013 LEAPS.
As for Options Profits, some of the analysts are very clear on entry conditions while others are a bit cagey. With Options Profits, you have to pick and choose which analysts to follow — one of the analysts there, for example, recently put together a spread and suggested it be bought at $0.10. A couple of days later, the spread was selling for $0.50 and the analyst posted an update saying that people should sell the spread for a profit of $0.30. In the update, the analyst also mentioned, by the way, that he made a mistake in the original post — he said that he should have said to buy the spread for $0.20, not $0.10. With this sort of revisionist trading, it’s hard not to win. This underlines the need to parse everything the analysts say at Options Profits.
Follow-Through or Closing The Trade – It’s great to open a trade. It fills you with optimism that you’re doing something to make money and you buy into the story an analyst has told about the trade. Then things start going sour, and you can wait days, weeks, or months, sometimes in futility, for an update from the analyst to take action. With the transparency and tracking at MF Options, this isn’t really a problem, unless your subscription lapses while you wait for instructions to close. The trades may take a few months to mature, but MF Options does follow-through.
The analysts at Options Profits run the gamut on follow-through, but I have noticed things improving recently. The better analysts there will tell you under what conditions to enter a trade and under what conditions to exit on both the profit and the stop-loss side. This information can be easily entered as limit or contingency orders at your brokerage.
Some people also think education and social interactivity are important, but I don’t see it that way. If you need education, take a class or read a book. Don’t pay for some service to “educate” you — it just should not be a selling point. The people at Motley Fool Options make a big deal about the options education available at their site. Here’s how they answer the education question at Options Profits: http://www.optionseducation.org. That, and also a series of Options Profits TV instructional videos.
How interactive or social are the two services? The Motley Fool of course made their name by establishing an online community of “fools” in the 90’s on AOL, so the forum is an integral part of Motley Fool Options. Unless I have a few hours to kill, though, the forum is invisible to me. Just for the purposes of comparison, I looked for a forum attached to the Options Profits service, but didn’t find one. The thing is, I didn’t miss it. The extent of interactivity, discussion, social discourse etc. at OP is pretty much the comments section to each post. Since it’s a newer service, I think they’re still getting some of the kinks out and they lost most of their comment history a couple of days ago when they switched to the Disqus comment management platform.
The Guys At Motley Fool Options
For its options service, the Motley Fool claims to pick and choose the best stock ideas and theses from among all the other Motley Fool services, and put an options oriented spin on them for the purposes of leverage and hedging. They tend to come up with perhaps one trade a week and there are two analysts whose approaches appear similar. I haven’t seen any sort of option market insiders commentary from these guys, like I’ve seen from some of the Options Profits guys — no “playing the skew” or “following the paper” here.
To tell you the truth, I couldn’t tell the difference in trading style between Jim Gillies and Jeff Fischer, but MF does keep a scorecard on the success/failure of each columnist’s activity.
- Jim Gillies – As of August 25, 2010, Jim’s total returns since the inception of MF Options in September 2009 is -5.4%. That’s right, negative 5.4%. Over the same period, the S&P 500 went up 6.1%.
- Jeff Fischer – As of August 25, 2010, Jeff’s total returns since inception have been +22.2%.
I think I know whose emails I ‘m going to be reading and whose will end up getting filtered into my garbage folder …
The Analysts At Options Profits
Options Profits has a whole slew of analysts that run the gamut. And each one is apparently contracted to supply at least one trade a day, so you end up with more than forty trades a week stuffing your inbox.
There are a couple of problems with this. First, trying to read all these trades and keep up with them can be akin to drinking from a fire hose. And second, many of the trades are very short-term (sometimes they’re closed within hours, and these guys are not afraid to buy weeklies…) — if you’re not on top of your email and also have your brokerage’s website open, you could miss a good trade or the suggestion to close a position.
My suggestion? Look at the list of analysts and figure out which one(s) fit your sentiment and capital/margin situation.
- Skip Raschke – Skip likes to set up limited risk positions that work for traders with limited capital — I don’t recall seeing any significant credit positions coming from him. Just buying some straight calls and puts with the occasional bull call spread or bear put spread. I like his trades; they’re fast, speculative, and based on reasoned technicals and fundamental developments. Although Skip doesn’t necessarily own the trades he describes, he does clearly delineate entry and exit points, and he updates whether or not the trade is possible according to his conditions by posting “The current ask is x. The trade is a go.” type comments a few hours after the post. This means that he is not one of these analysts who creates sweet but impossible trades that can never be executed because the spread is too wide. Skip Raschke is one of the keepers at “Options Profits”.
- Terry Bradford – Terry leans to the bear side of things (at least during the month of August 2010, when I had my free trial with Options Profits …), and trades options on the indices. He does have some skin in the game as evidenced by the disclosures at the end of his posts and his updates in the comments. Terry’s trades, entrance and exit points are well-defined and realistic. Sometimes a trade won’t materialize because it doesn’t meet Terry’s conditions, but Terry almost always re-evaluates the situation and adjusts accordingly. Good follow-through and follow-up on trades is always appreciated. On a bearish tape at least, Terry offers some good profitable option trades that don’t require much margin or capital outlay.
- Paul Price – Here is Dr. Price’s favorite trade: the covered strangle. That is, Dr. Price identifies a stock he would like to buy at current levels, figures out how many shares he would ultimately want to own, and buys half that amount. If he wanted 2000 shares of MSFT (not one of his trades, btw), he would buy 1000. Then he would write a covered call on the shares he bought — if he bought 1000 MSFT at 25, he would sell 10 MSFT calls with a 25 strike. In addition, because he would be comfortable buying another 1000 shares of MSFT at a lower price, he would also write 10 puts on MSFT with a 25 strike. This is an interesting strategy that pays off as long as the underlying stock doesn’t fall apart. It’s like writing covered calls except it essentially doubles your income with only a moderate increase in risk. The capital outlay (or margin commitment, if you play that dangerous game …) is high, though, and since Dr. Price’s disclosures reveal that he always has a position in the trade he promulgates, one concludes he is a wealthy man indeed. For most people, I think, his trades are mostly unrealistic as written, but they are food for thought. Note that Motley Fool Options has recently begun making some covered strangle recommendations, which is a departure from their usual covered call strategy. On the whole, I like Dr. Price’s recommendations and his crystal clear explanations.
- Phil McDonnell – At first, I found Mr. McDonnell’s recommendations to be in that category of sweet but impossible trades. Lately, however, I think he has taken heed of some of the comments left for him and he now delineates much more clearly the opening and closing conditions of a trade. Phil leans toward multi-legged positions that don’t put much capital on the line but could pay off big. By the way, Phil also wrote “Optimal Portfolio Modeling” published by Wiley Trading, which covers position sizing. This is one of my weak points so I am plan to buy and read Phil’s book. For Options Profits, I think Phil had a bit of a rocky start, but I’m glad to see he’s improving his transparency and follow-through.
- Mark Sebastian – Mark keeps an eye on the “paper”, unusual options activity for specific issues, and extrapolates from that the underlying stock’s behavior. Then he sets up a trade that has a significant advantage over the paper in terms of volatility, delta, etc. Mark’s reasoning is crystal clear and his trades are straight-forward, mostly consisting of only one or two legs and they tend not to require much capital or margin. Mark is probably my favorite analyst at OP.
These are only a few of the twenty or so analysts at Options Profits. If I get a chance, I will add my critiques of some of the other analysts at Options Profits.
In the end, it may not be fair to compare these two services because of their completely different target audiences. MF Options is really for long-term investors looking to juice their returns through strategies like repeated covered call writing where you try to keep underlying equities over long periods of time. And Options Profits is for somewhat sophisticated traders looking for ideas and/or information they don’t have time to research themselves — OP offers the a panoply of options strategies, so the OP reader needs to know himself in order to choose from the trades offered those that best suit their sentiment, style and circumstances.
Neither service is appropriate for the novice, though — before following either, save your money, read some books, take a class or two, and watch some podcasts/videos about options trading. Watch Fast Money and Options Action. Then, when you can explain a butterfly to you mother without causing her head to explode, and only then, might you be ready to start trading options with these guys’ help.